How to Filter for Trading CandidatesIntroduction
This post explores how to filter tradable assets using structural and behavioral criteria. While the examples focus on swing trading stocks, the same principles apply across other markets.
A structured selection process helps refine the list of candidates and supports a more consistent approach. The use of filters can reduce the universe of stocks to those that fit the chosen method. For example, in momentum trading, the purpose is to find stocks that have already shown strong movement and may offer continuation opportunities.
There are multiple approaches to selection. This chapter focuses on two practical methods: scan-based filtering and a top-down approach.
Foundational Filters
These basic criteria can be applied across all scans and serve to exclude assets that are illiquid or incompatible with standard execution. The specific thresholds used may depend on personal account size, capital allocation and trading style. This guide focuses on swing trading, where moderate liquidity and price stability are important to ensure consistent fills and manageable risk.
The Sector Relative Strength tool can help show leading sectors versus the S&P 500 Index over the longer term. This optional top-down approach highlights which areas of the market are outperforming and can support manual refinement.
Setup-Based Filters
These examples demonstrate criteria for identifying potential continuation setups following recent momentum. The filters shown are for bullish conditions; for bearish setups, the logic is reversed. For other approaches, such as fading, filters based on excursion/overextension would be applied instead.
Use the Momentum Tracker to visualize when stocks historically met each of these criteria. This helps evaluate the behavior that preceded meaningful setups and refine your filters over time.
Optional Refinement Filters
These filters can help focus the scans further and improve candidate quality.
Candidates can also be sorted based on preference. A common method is to sort by recent volatility, such as ATR%, or distance from the mean price to prioritize price retracement or contraction.
Momentum Scan Example
This sample scan uses normalized momentum to identify new highs in price. The method is standardized and adapts well across different markets. In case the number of candidates is extensive, filters can be more restrictive or additional criteria applied to narrow the selection.
Market Context
Market breadth is the equilibrium between the number of stocks in advance to those in a decline, in other words a method to determine the current market environment. In a positive phase, bullish setups will have improved probabilities and presence, whereas in a bearish phase the opposite would be true. There tends to be a correlation in the market, where stocks often move in line with their sector or the broader index. Being aware of where capital is flowing helps align trades with the broader environment. In case one has an effective scan and review process, much of this assessment is implicitly accounted for.
This guide will not cover these in depth, but there are numerous ways to evaluate market context; such as reviewing index or sector performance, market breadth, and monitoring economic or macro events. The most important part is to be consistent and apply discretion within the chosen process.
